LRY has a large concentration of assets in low barrier, slower growth markets. The company has diluted earnings through a disposition campaign that should upgrade the portfolio in the long run, although this will inhibit near-term FFO growth. The development pipeline is not significantly pre-leased, which adds to downside risk.
Shares have somewhat recovered over the past few months, although we are expecting more downward pressure on the share price due to macro economic conditions. We are setting our price target at $30 per share or 9.5x 2008 FFO estimates.
Shire Pharmaceuticals Fair to $60
Shire Pharmaceuticals Group, PLC (SHPGY) is a specialty pharmaceutical company focused on three therapeutic areas: Central nervous system (CNS), gastro intestinal (GI), and renal disorders. The companyâ?s attention deficit hyperactivity disorder (ADHD) franchise continues to perform very well, increasing market share to over 31%.
Strong top-line growth should continue in 2008 as a number of new drugs ramp. Beyond 2008 we expect revenue growth to significantly slow due to the presence of generic Adderall XR. Vyvanse, the companyâ?s new flagship ADHD product, continues to perform well and will be the key driver of the top-line. The approval of Vyvanse in 2007 was a major positive for the company.
We believe that Shire will focus its efforts on the successful commercialization of Vyvanse, which we expect to ramp up very rapidly and to quickly become the companyâ?s flagship ADHD product. We believe the drug is much more than just an Adderall XR substitute, and are encouraged to hear that a significant number of scripts are coming from patients switching from a competitorâ?s ADHD drug. We view this as not only favorable evidence supporting Vyvanseâ?s claims of superior efficacy and safety but also as a benefit to Adderall XR sales, which we had previously modeled to deteriorate more rapidly. The adult indication allows Shire to market directly to this rapidly growing market which we expect to result in an additional boost to Vyvnase sales.
As of today's price, the stock is down about 19% since the beginning of the year. We expect strong top-line growth in 2008, but only about 6% average annual revenue growth from 2009 through 2012. Adderall XR will likely experience a precipitous drop-off in sales in 2009 due to generic competition which will translate into slower earnings growth.
However, the companyâ?s very strong ADHD franchise (Shireâ?s drugs account for 31.8% of ADHD U.S. prescription share) should allow Shire to realize some economies of scale in marketing and promotional costs once Vyvanse reaches a certain level of sales (likely around 2010). We look for Shire to also watch R&D spending post-Adderall loss of exclusivity which should also translate into incremental EPS growth.
We expect EPS to average a CAGR of almost 10% over the next five years.
